Blog description.

Accentuating the Liberal in Classical Liberal: Advocating Ascendency of the Individual & a Politick & Literature to Fight the Rise & Rise of the Tax Surveillance State. 'Illigitum non carborundum'.

Liberty and freedom are two proud words that have been executed from the political lexicon: they were frog marched and stood before a wall of blank minds, then forcibly blindfolded, and shot, with the whimpering staccato of ‘equality’ and ‘fairness’ resounding over and over. And not only did this atrocity go unreported by journalists in the mainstream media, they were in the firing squad.

The premise of this blog is simple: the Soviets thought they had equality, and welfare from cradle to grave, until the illusory free lunch of redistribution took its inevitable course, and cost them everything they had. First to go was their privacy, after that their freedom, then on being ground down to an equality of poverty only, for many of them their lives as they tried to escape a life behind the Iron Curtain. In the state-enforced common good, was found only slavery to the prison of each other's mind; instead of the caring state, they had imposed the surveillance state to keep them in line. So why are we accumulating a national debt to build the slave state again in the West? Where is the contrarian, uncomfortable literature to put the state experiment finally to rest?

Comments Policy: I'm not moderating comments, so keep it sane and go away with the spam. Government officials please read disclaimer at bottom of page.

Thursday, August 16, 2012

Premise: As only bureaucrats could,
they’ve over-analysed the criteria of economic loss, into a loss limitation
absurdity, that mistakes the nature of income and has careened, totally, off
the road of commercial reality and onward down our road to serfdom …

I
have now received back a reply from IRD Legal and Technical Services regarding
questions I submitted pertaining to LTC’s. As ever, IRD are always helpful on
these matters. My queries related to a number of different issues, but this
post relates only to the issue of the deduction limitation employed by this
regime. The following should stand alone, though knowledge of my previous LTC post here might fill out some of the details. The point of that post was
my chagrin at how the Look Through Company (LTC) regime employs a deduction
limitation rule, rather than a loss limitation rule. This means, per example
given in that post, that although a LTC may earn a loss, by the time that flows
through to the shareholders, some shareholders may be in a position whereby
they still have to pay tax on a positive income amount, because they may not be
able to utilise all of their share of the LTC’s deductions in any year. It’s
worth giving the example again (without getting bogged in the specifics of the
calculations):

The
hypothetical company has a single shareholder with share capital of $1,000; the
owner had a nil balance in his current account with the company at the start of
the year, but over the year drew out $6,000 to live on. Over the year’s trading
the company made total sales of $6,000, and incurred legitimate
expenses/deductions of $10,000, meaning it made a bone fide loss of $4,000.
Let’s assume no non-cash depreciation, nor debtors or creditors at year end,
thus the company’s bank account, on nil at the start of the year, is now
$10,000 overdrawn (being the $4,000 loss, plus the owners drawings of $6,000).

The
problem is that what is known as the Owner’s Basis calculation means that by
the time these figures flow through to the single shareholder, that shareholder
can only claim $1,000 of the $10,000 total deductions, in this instance, with
the balance of $9,000 having to be carried through to the next year. This then
means that though the company earned a loss of $4,000, the shareholder, in the
year of the loss, has to pay tax on an ‘income’ of $5,000. As I shall
demonstrate again, via the advice from IRD technical, which clearly informs me,
quote, ‘Inland Revenue’s Policy Advice Division (PAD), and the Minister, are
fully aware of the issues [I] raise’, this is batshit crazy; but another issue
first.

My
original post was posted to propertytalk.com, where in the comments fields accountant Matt Gilligan, from Gilligan, Rowe & Associates
(recommended if you’re looking for an accountant for your property investment –
he knows what he’s doing), stated, under disadvantages of the LTC regime:

Possible impact of deduction
limitation rules (less of an issue in 99% of cases and easily worked around
with a bit of thinking and pre-planning if an issue)…

This
was one of only two points Matt made I disagree with. My response to that was
simply: ‘I suspect, but only time will
tell, that number will be lower than 99%, and the pre-planning may be more
hopeful, than actual, and in many instances will involve significant
transaction cost which is not 'good legislation'. I do believe that some
companies elected into the LTC regime will ‘over time’ come to grief on the
provisions of the deduction limitation. But, actually, that was not the point
of my original post, or this one. Let’s give Matt the point and say this may be
so rare – it won’t be, but let’s pretend - it only happens to one taxpayer a year:
well that’s one too many when properly thought out legislation, fair legislation, could have avoided it. And so to my remaining point,
proper, the nonsense that is the deduction limitation.

Here’s
what the deduction limitation is attempting to do, I’m copying it directly from
IRD Technical’s correspondence with me because it sets it out well:

The intention is to measure an
individual’s ‘economic amount of risk’ over the lifetime of a business; so
overall an individual will be able to claim in deductions only what they have
personally funded by taking on an economic risk … I note your comments that the
rules are not truly ‘loss limitation’ because in certain circumstances they can
lead to taxable income for a shareholder even if the company overall … has made
a tax loss … This is the intended outcome of the loss limitation rule. This is
in keeping with the policy rationale discussed above, because it indicates that
the company’s losses are not being ‘funded’ by that particular owner. In this
example, the current rule is operating with the intended policy that their tax deductions
should be restricted to their economic loss.’

Right,
now look above at that example I’ve given, again. And look what happens when
your life is voted over to the policy making of bureaucrats.

Yes,
the shareholders economic interest in the deductions may be only that amount, in
my example, $1,000, but who financed the rest? In this case, it was the bank,
hence the perilous cash position. Some might say that can’t happen, no bank
would finance that: but, actually, this does happen. Where this then
goes wrong is that to limit the shareholders’s deductions to that lesser amount,
IRD are assuming that shareholder has access to the whole gross income that is
covered by the non-allowed deductions, for them to pay the tax from: which is a
nonsense. That income is not sitting in an account, it, and an overdraft, were
used to pay the non-allowed expenditure. There is no cash this shareholder has
access to pay tax on what is an artifact that can (and will) result sometimes
from these calculations: effectively, an artificial income amount.

As
stated at the start of the policy advice, ‘PAD (and the minister) are fully
aware of the issues raised’ – well in that case, I question the judgement of
this Minister; because this situation is not acceptable. I would have hoped
that any politician who saw it was possible under his legislation to end up
paying tax on a $5,000 ‘profit’ when a business generates a $4,000 loss, would
have realised he had stuffed up. Just look at this one simple result of a
worked example: how could that, to a sane person, possibly be right? For
someone who keeps twittering about fairness, the Minister has achieved
the opposite. And here’s where it happened: the calculations involved with the
loss/deduction limitation, are the result of bureaucrats, unsullied by the real
world of business, completely over-analysing theory, the theory of economic
loss, through to an absurdity, which may well, now, wash up some poor taxpayers
on the reef of bureaucratic cruelty. This result of tracing through economic
loss to deductions, while disregarding the nature of income, the structuring of
balance sheets, bears no regard to the commercial realities of operating
business. Mind you, that’s taxation, and the enforcement of it, period.

This
is not good legislation, and there needs to be an amendment that ensures
enough deductions are allowed, to at the least mean a shareholder need return
no more than their share of the profit made by the underlying LTC, and no less
of a loss, than a nil result in their own tax return. That would not be hard to
enact.

2 comments:

While simplicity would help, I don't consider tax policy, via tax policy, but simply by how can we reduce the size of the state from where it is getting close to being almost half the spend in the economy, to something much more responsibly smaller, so innocent taxpayers don't need to be taxed like this. Even under English, the government continues to increase year on year.

That is, tax policy does not come from economic policy, but philosophy, and principally, ethics.

Civilisation is a movement toward privacy, an Orwellian surveillance state the opposite, and tax legislation, especially tax administration, has become the legislation and administration of surveillance and authoritarian rule, in contravention of the rule of law, and common decency. IR

If the Founding Fathers could see how freedom is bound, again, under the iron fist of our taxing authorities; New Zealand's IRD, America's IRS, UK's HMRC, a secret police operating in every country, there would be a Western Spring.

This blog is the only form my protest can take, hoping not to become a squashed blug on the windscreen of state.

Disclaimer: If you pay anything other than the correct amount of tax - as hard as that can be to calculate under our mess of tax law - then you're a bloody idiot. The IR's are all-powerful: they are not a construct of a free, voluntary, civilised classical liberalism, they are a relic of totalitarianism. You have no liberty or privacy from the IR's, you have no legal defence against them, you cannot refuse to be interrogated, you cannot question their actions or seek judicial review holding them to account, even the burden of proof has been turned against the taxpayer; before the law, though you have done nothing wrong, you have less rights than a murderer or rapist, and this Department has been charged by the Fortress of Legislation to systematically eavesdrop and investigate all of us. Don't mess with them. And let me put on record, the IRD staffers I deal with daily are ‘good’ people, I have no complaint whatsoever on a personal/personable level; but this blog is about the principles involved, and it remains my hope there is enough of a classical liberal ethic left, admitting debate and ' difference', that this blog is taken only for the contained - to these pages - protest that it is. For let me spell it out - you, Big Brother State, have won: I.Am.Scared.Of.You.You bet I am. But there's this loon in me that can't seem to shut up. (You're lucky, my poor wife has to live with it).

Copyright

All posts copyright Mark Hubbard and Life Behind the IRon Drape. Contents may be reproduced without permission provided credit is given to the author, it is not altered in any way, the context is made clear and a link is provided to the original.